AFFIDAVIT ATTACHED FOR REFERENCE

STATE OF MICHIGAN IN THE CIRCUIT COURT FOR THE COUNTY OF OAKLAND

) ) Case No. 03-047448-CZ ) Plaintiff, ) Hon. E.. Sosnick ) v. ) AFFIDAVIT OF WA
LKER F. TODD, ) EXPERT WITNESS FOR DEFENDANTS HARSHAVARDHAN DAVE and ) PRATIMA D
AVE, jointly and severally, ) ) Defendants. ) __________________________________
______________________________________ BANK ONE, N.A., Harshavardhan Dave and Pr
atima H. Dave C/o 5128 Echo Road Bloomfield Hills, MI 48302 Defendants, in propr
ia persona Michael C. Hammer (P41705) Ryan O. Lawlor (P64693) Dickinson Wright P
LLC Attorneys for Bank One, N.A. 500 Woodward Avenue, Suite 4000 Detroit, Michig
an 48226 (313) 223-3500
Now comes the Affiant, Walker F. Todd, a citizen of the United States and the St
ate of Ohio over the age of 21 years, and declares as follows, under penalty of
perjury: 1. That I am familiar with the Promissory Note and Disbursement Request
and Authorization, dated November 23, 1999, together sometimes referred to in o
ther documents filed by Defendants in this case as the alleged agreement between D
efendants and Plaintiff but called the Note in this Affidavit. If called as a witn
ess, I would testify as stated herein. I make this Affidavit based on my own per
sonal knowledge of the legal, economic, and historical principles stated herein,
except that I have relied entirely on documents provided to me, including the N
ote, regarding
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certain facts at issue in this case of which I previously had no direct and pers
onal knowledge. I am making this affidavit based on my experience and expertise
as an attorney, economist, research writer, and teacher. following statements. P
ROFESSIONAL BACKGROUND QUALIFICATIONS 2. My qualifications as an expert witness
in monetary and banking instruments are as follows. For 20 years, I worked as an
attorney and legal officer for the legal I am competent to make the
departments of the Federal Reserve Banks of New York and Cleveland. Among other
things, I was assigned responsibility for questions involving both novel and rou
tine notes, bonds, bankers' acceptances, securities, and other financial instrumen
ts in connection with my work for the Reserve Banks' discount windows and parts of
the open market trading desk function in New York. In addition, for nine years,
I worked as an economic research officer at the Federal Reserve Bank of Clevela
nd. I became one of the Federal Reserve System's recognized experts on the legal h
istory of central banking and the pledging of notes, bonds, and other financial
instruments at the discount window to enable the Federal Reserve to make advance
s of credit that became or could become money. I also have read extensively trea
tises on the legal and financial history of money and banking and have published
several articles covering all of the subjects just mentioned. I have served as
an expert witness in several trials involving banking practices and monetary ins
truments. A summary biographical sketch and resume including further details of
my work experience, readings, publications, and education will be tendered to De
fendants and may be made available to the Court and to Plaintiff's counsel upon re
quest. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
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3. Banks are required to adhere to Generally Accepted Accounting Principles (GAA
P). GAAP follows an accounting convention that lies at the heart of the double-e
ntry bookkeeping system called the Matching Principle. This principle works as f
ollows: When a bank accepts bullion, coin, currency, checks, drafts, promissory
notes, or any other similar instruments (hereinafter instruments) from customers a
nd deposits or records the instruments as assets, it must record offsetting liab
ilities that match the assets that it accepted from customers. The liabilities r
epresent the amounts that the bank owes the customers, funds accepted from custo
mers. In a fractional reserve banking system like the United States banking syst
em, most of the funds advanced to borrowers (assets of the banks) are created by
the banks themselves and are not merely transferred from one set of depositors
to another set of borrowers. RELEVANCE OF SUBTLE DISTINCTIONS ABOUT TYPES OF MON
EY 4. From my study of historical and economic writings on the subject, I conclu
de that a common misconception about the nature of money unfortunately has been
perpetuated in the U.S. monetary and banking systems, especially since the 1930s
. In classical economic theory, once economic exchange has moved beyond the bart
er stage, there are two types of money: money of exchange and money of account..
For nearly 300 years in both Europe and the United States, confusion about the
distinctiveness of these two concepts has led to persistent attempts to treat mo
ney of account as the equivalent of money of exchange. In reality, especially in
a fractional reserve banking system, a comparatively small amount of money of e
xchange (e.g., gold, silver, and official currency notes) may support a vastly l
arger quantity of business transactions denominated in money of account. The sum
of these
transactions is the sum of credit extensions in the economy. With the exception
of
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customary stores of value like gold and silver, the monetary base of the economy
largely consists of credit instruments. Against this background, I conclude tha
t the Note, despite some language about lawful money explained below, clearly cont
emplates both disbursement of funds and eventual repayment or settlement in mone
y of account (that is, money of exchange would be welcome but is not required to
repay or settle the Note). The factual basis of this conclusion is the referenc
e in the Disbursement Request and Authorization to repayment of
$95,905.16 to Michigan National Bank from the proceeds of the Note. That was an
exchange of the credit of Bank One (Plaintiff) for credit apparently and previou
sly extended to Defendants by Michigan National Bank. Also, there is no reason t
o believe that Plaintiff would refuse a substitution of the credit of another ba
nk or banker as complete payment of the Defendants' repayment obligation under the
Note. This is a case about exchanges of money of account (credit), not about ex
changes of money of exchange (lawful money or even legal tender). 5. Ironically,
the Note explicitly refers to repayment in lawful money of the United States of
America (see Promise to Pay clause). Traditionally and legally,
Congress defines the phrase lawful money for the United States. Lawful money was t
he form of money of exchange that the federal government (or any state) could be
required by statute to receive in payment of taxes or other debts. Traditionall
y, as defined by Congress, lawful money only included gold, silver, and currency
notes redeemable for gold or silver on demand. In a banking law context, lawful
money was only those forms of money of exchange (the forms just mentioned, plus
U.S. bonds and notes redeemable for gold) that constituted the reserves of a na
tional bank prior to 1913 (date of creation of the Federal Reserve Banks). See,
Lawful Money,
4
Webster's New International Dictionary (2d ed. 1950).
In light of these facts, I
conclude that Plaintiff and Defendants exchanged reciprocal credits involving mo
ney of account and not money of exchange; no lawful money was or probably ever w
ould be disbursed by either side in the covered transactions. This
conclusion also is consistent with the bookkeeping entries that underlie the loa
n account in dispute in the present case. Moreover, it is puzzling why Plaintiff
would retain the archaic language, lawful money of the United States of America,
in its otherwise modern-seeming Note. It is possible that this language is merel
y a legacy from the pre-1933 era. Modern credit agreements might include repayme
nt language such as, The repayment obligation under this agreement shall continue
until payment is received in fully and finally collected funds, which avoids the
entire question of In what form of money or
credit is the repayment obligation due?
6. Legal tender, a related concept but one that is economically inferior to lawf
ul money because it allows payment in instruments that cannot be redeemed for go
ld or silver on demand, has been the form of money of exchange commonly used in
the United States since 1933, when domestic private gold transactions were suspe
nded (until 1974).. Basically, legal tender is whatever the government says that
it is. The most common form of legal tender today is Federal Reserve notes, whi
ch by law cannot be redeemed for gold since 1934 or, since 1964, for silver. 510
3, 5118 (b), and 5119 (a). See, 31 U.S.C. Sections
Note: I question the statement that fed reserve notes cannot be redeemed for sil
ver since 1964. It was Johnson who declared on 15 Marcy 1967 that after 15 June
1967 that Fed Res Notes would not be exchanged for silver and the practice did s
top on 15 June
5
1967 not 1964. I believe this to be error in the text of the author's affidavit. 7
. Legal tender under the Uniform Commercial Code (U.C.C.), Section 1-201 (24) (O
fficial Comment), is a concept that sometimes surfaces in cases of this nature..
The referenced Official Comment notes that the definition of money is not limit
ed to legal tender under the U.C.C. Money is defined in Section 1-201 (24) as a m
edium of exchange authorized or adopted by a domestic or foreign government and
includes a monetary unit of account established by an intergovernmental organiza
tion or by agreement between two or more nations. The relevant Official Comment s
tates that The test adopted is that of sanction of government, whether by authori
zation before issue or adoption afterward, which recognizes the circulating medi
um as a part of the official currency of that government. The narrow view that m
oney is limited to legal tender is rejected. Thus, I conclude that the U.C.C. ten
ds to validate the classical theoretical view of money.
HOW BANKS BEGAN TO LEND THEIR OWN CREDIT INSTEAD OF REAL MONEY
8.
In my opinion, the best sources of information on the origins and use of credit
as money are in Alfred Marshall, MONEY, CREDIT & COMMERCE 249-251 (1929) and Cha
rles P. Kindleberger, A FINANCIAL HISTORY OF WESTERN EUROPE 50-53 (1984). A synt
hesis of these sources, as applied to the facts of the present case, is as follo
ws: As commercial banks and discount houses (private bankers) became established
in parts of Europe (especially Great Britain) and North America, by the mid-nin
eteenth century they commonly made loans to borrowers by extending their own cre
dit to the borrowers or, at the borrowers' direction, to third parties. The typica
l form of such extensions of credit was drafts or bills of exchange drawn upon t
hemselves (claims on the credit of the drawees) instead of disbursements of bull
ion,
6
coin, or other forms of money. In transactions with third parties, these drafts
and bills came to serve most of the ordinary functions of money. The third parti
es had to determine for themselves whether such credit money had value and, if so,
how much. The Federal Reserve Act of 1913 was drafted with this model of the
commercial economy in mind and provided at least two mechanisms (the discount wi
ndow and the open-market trading desk) by which certain types of bankers' credits
could be exchanged for Federal Reserve credits, which in turn could be withdrawn
in lawful money. Credit at the Federal Reserve eventually became the principal
form of monetary reserves of the commercial banking system, especially after the
suspension of domestic transactions in gold in 1933. Thus, credit money is not
alien to the current official monetary system; it is just rarely used as a devic
e for the creation of Federal Reserve credit that, in turn, in the form of eithe
r Federal Reserve notes or banks' deposits at Federal Reserve Banks, functions as
money in the current monetary system. In fact, a means by which the Federal Rese
rve expands the money supply, loosely defined, is to set banks' reserve requiremen
ts (currently, usually ten percent of demand liabilities) at levels that would e
ncourage banks to extend new credit to borrowers on their own books that third p
arties would have to present to the same banks for redemption, thus leading to a
n expansion of bank-created credit money. In the modern economy, many non-bank p
roviders of credit also extend book credit to their customers without previously
setting aside an equivalent amount of monetary reserves (credit card line of cr
edit access checks issued by non-banks are a good example of this type of credit
), which also causes an expansion of the aggregate quantity of credit money. The
discussion of money taken from Federal Reserve and other modern sources in para
graphs 11 et seq. is consistent with the account of the
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origins of the use of bank credit as money in this paragraph. ADVANCES OF BANK C
REDIT AS THE EQUIVALENT OF MONEY 9. Plaintiff apparently asserts that the Defend
ants signed a promise to pay, such as a note(s) or credit application (collectiv
ely, the Note), in exchange for the Plaintiff's advance of funds, credit, or some ty
pe of money to or on behalf of Defendant. However, the bookkeeping entries requi
red by application of GAAP and the Federal Reserve's own writings should trigger c
lose scrutiny of Plaintiff's apparent assertions that it lent its funds, credit, o
r money to or on behalf of Defendants, thereby causing them to owe the Plaintiff
$400,000. According to the bookkeeping entries shown or otherwise described to
me and application of GAAP, the Defendants allegedly were to tender some form of
money (lawful money of the United States of America is the type of money explicit
ly called for in the Note), securities or other capital equivalent to money, fun
ds, credit, or something else of value in exchange (money of exchange, loosely d
efined), collectively referred to herein as money, to repay what the Plaintiff cla
ims was the money lent to the Defendants. It is not an unreasonable argument to
state that Plaintiff apparently changed the economic substance of the transactio
n from that contemplated in the credit application form, agreement, note(s), or
other similar instrument(s) that the Defendants executed, thereby changing the c
osts and risks to the Defendants. At most, the Plaintiff extended its own credit
(money of account), but the Defendants were required to repay in money (money o
f exchange, and lawful money at that), which creates at least the inference of i
nequality of obligations on the two sides of the transaction (money, including l
awful money, is to be exchanged for bank credit). MODERN AUTHORITIES ON MONEY
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11.To understand what occurred between Plaintiff and Defendants concerning the a
lleged loan of money or, more accurately, credit, it is helpful to review a mode
rn Federal Reserve description of a bank's lending process. See, David H. Friedman
, MONEY AND BANKING (4th ed. 1984)(apparently already introduced into this case)
: The commercial bank lending process is similar to that of a thrift in that the
receipt of cash from depositors increases both its assets and its deposit liabil
ities, which enables it to make additional loans and investments. . . . When a c
ommercial bank makes a business loan, it accepts as an asset the borrower's debt o
bligation (the promise to repay) and creates a liability on its books in the for
m of a demand deposit in the amount of the loan. (Consumer loans are funded simil
arly.) Therefore, the bank's original bookkeeping entry should show an increase in
the amount of the asset credited on the asset side of its books and a correspon
ding increase equal to the value of the asset on the liability side of its books
. This would show that the bank received the customer's signed promise to repay as
an asset, thus monetizing the customer's signature and creating on its books a li
ability in the form of a demand deposit or other demand liability of the bank. T
he bank then usually would hold this demand deposit in a transaction account on
behalf of the customer. Instead of the bank lending its money or other assets to
the customer, as the customer reasonably might believe from the face of the Not
e, the bank created funds for the customer's transaction account without the custo
mer's permission, authorization, or knowledge and delivered the credit on its own
books representing those funds to the customer, meanwhile alleging that the bank
lent the customer money. If Plaintiff's response to this line of argument is to t
he effect that it acknowledges that it lent credit or issued credit instead of m
oney, one might refer to Thomas P. Fitch, BARRON'S
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BUSINESS GUIDE DICTIONARY OF BANKING TERMS, Credit banking, 3. Bookkeeping entry re
presenting a deposit of funds into an account. But Plaintiff's loan agreement appar
ently avoids claiming that the bank actually lent the Defendants money. They app
arently state in the agreement that the Defendants are obligated to repay Plaint
iff principal and interest for the Valuable consideration (money) the bank gave t
he customer (borrower). The loan agreement and Note apparently still delete any r
eference to the bank's receipt of actual cash value from the Defendants and exchan
ge of that receipt for actual cash value that the Plaintiff banker returned. 12.
According to the Federal Reserve Bank of New York, money is anything that has va
lue that banks and people accept as money; money does not have to be issued by t
he government. For example, David H. Friedman, I BET YOU THOUGHT. . . . 9, Feder
al Reserve Bank of New York (4th ed. 1984)(apparently already introduced into th
is case), explains that banks create new money by depositing IOUs, promissory no
tes, offset by bank liabilities called checking account balances. Page 5 says, Mo
ney doesn't have to be intrinsically valuable, be issued by government, or be in a
ny special form. . . . 13.The publication, Anne Marie L. Gonczy, MODERN MONEY MEC
HANICS 7-33, Federal Reserve Bank of Chicago (rev. ed. June 1992)(apparently alr
eady introduced into this case), contains standard bookkeeping entries demonstra
ting that money ordinarily is recorded as a bank asset, while a bank liability i
s evidence of money that a bank owes. The bookkeeping entries tend to prove that
banks accept cash, checks, drafts, and promissory notes/credit agreements (asse
ts) as money deposited to create credit or checkbook money that are bank liabili
ties, which shows that, absent any right of setoff, banks owe money to persons w
ho deposit money.. Cash (money of
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exchange) is money, and credit or promissory notes (money of account) become mon
ey when banks deposit promissory notes with the intent of treating them like dep
osits of cash. See, 12 U.S.C. Section 1813 (l)(1) (definition of deposit under Fed
eral Deposit Insurance Act). The Plaintiff acts in the capacity of a lending or
banking institution, and the newly issued credit or money is similar or equivale
nt to a promissory note, which may be treated as a deposit of money when receive
d by the lending bank.. Federal Reserve Bank of Dallas publication MONEY AND
BANKING, page 11, explains that when banks grant loans, they create new money. T
he new money is created because a new loan becomes a deposit, just like a paychec
k does. MODERN MONEY MECHANICS, page 6, says, What they [banks] do when they make
loans is to accept promissory notes in exchange for credits to the borrowers' tran
saction accounts. The next sentence on the same page explains that the banks' asset
s and liabilities increase by the amount of the loans. COMMENTARY AND SUMMARY OF
ARGUMENT 14. Plaintiff apparently accepted the Defendants' Note and credit applic
ation (money of account) in exchange for its own credit (also money of account)
and deposited that credit into an account with the Defendants' names on the accoun
t, as well as apparently issuing its own credit for $95,905.16 to Michigan Natio
nal Bank for the account of the Defendants. One reasonably might argue that the
Plaintiff recorded the Note or credit application as a loan (money of account) f
rom the Defendants to the Plaintiff and that the Plaintiff then became the borro
wer of an equivalent amount of money of account from the Defendants.
15. The Plaintiff in fact never lent any of its own pre-existing money, credit,
or assets as consideration to purchase the Note or credit
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agreement from the Defendants. (Robertson Notes: I add that when the bank
does the forgoing, then in that event, there is an utter failure of consideratio
n for the loan contract.) When the Plaintiff deposited the Defendants' $400,000 of n
ewly issued credit into an account, the Plaintiff created from $360,000 to $400,
000 of new money (the nominal principal amount less up to ten percent or $40,000
of reserves that the Federal Reserve would require against a demand deposit of
this size). The Plaintiff received $400,000 of credit or money of account from t
he Defendants as an asset. GAAP ordinarily would require that the Plaintiff reco
rd a liability account, crediting the Defendants' deposit account, showing that th
e Plaintiff owes $400,000 of money to the Defendants, just as if the Defendants
were to deposit cash or a payroll check into their account. 16. The following ap
pears to be a disputed fact in this case about which I have insufficient informa
tion on which to form a conclusion: I infer that it is alleged that Plaintiff re
fused to lend the Defendants Plaintiff's own money or assets and recorded a $400,0
00 loan from the Defendants to the Plaintiff, which arguably was a $400,000 depo
sit of money of account by the Defendants, and then when the Plaintiff repaid th
e Defendants by paying its own credit (money of account) in the amount of $400,0
00 to third-party sellers of goods and services for the account of Defendants, t
he Defendants were repaid their loan to Plaintiff, and the transaction was compl
ete. 17. I do not have sufficient knowledge of the facts in this case to form a
conclusion on the following disputed points: None of the following material fact
s are disclosed in the credit application or Note or were advertised by Plaintif
f to prove that the Defendants are the true lenders and the Plaintiff is the tru
e borrower. The Plaintiff
is trying to use the credit application form or the Note to persuade
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and deceive the Defendants into believing that the opposite occurred and that th
e Defendants were the borrower and not the lender. The
following point is undisputed: The Defendants' loan of their credit to Plaintiff,
when issued and paid from their deposit or credit account at Plaintiff, became m
oney in the Federal Reserve System (subject to a reduction of up to ten percent
for reserve requirements) as the newly issued credit was paid pursuant to writte
n orders, including checks and wire transfers, to sellers of goods and services
for the account of Defendants. CONCLUSION 18. Based on the foregoing, Plaintiff
is using the Defendant's Note for its own purposes, and it remains to be proven wh
ether Plaintiff has incurred any financial loss or actual damages (I do not have
sufficient information to form a conclusion on this point). In any case, the in
clusion of the lawful money language in the repayment clause of the Note is confus
ing at best and in fact may be misleading in the context described above. AFFIRM
ATION 19. I hereby affirm that I prepared and have read this Affidavit and that
I believe the foregoing statements in this Affidavit to be true. I hereby furthe
r affirm that the basis of these beliefs is either my own direct knowledge of th
e legal principles and historical facts involved and with respect to which I hol
d myself out as an expert or statements made or documents provided to me by thir
d parties whose veracity I reasonably assumed. Further the Affiant sayeth naught
. At Chagrin Falls, Ohio
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December 5, 2003
_____________________________________ WALKER F. TODD (Ohio bar no. 0064539) Expe
rt witness for the Defendants Walker F. Todd, Attorney at Law 1164 Sheerbrook Dr
ive Chagrin Falls, Ohio 44022 (440) 338-1169, fax (440) 338-1537 e-mail: westodd
@adelphia.net
<mailto:westodd@adelphia.net> NOTARY'S VERIFICATION At Chagrin Falls, Ohio Decembe
r 5, 2003 On this day personally came before me the above-named Affiant, who pro
ved his identity to me to my satisfaction, and he acknowledged his signature on
this Affidavit in my presence and stated that he did so with full understanding
that he was subject to the penalties of perjury. _______________________________
______ Notary Public of the State of Ohio
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